Tuning in: two years after a controversial media law, much-needed foreign cash trickles into Brazil.

Recent deals are bringing rare foreign capital into Brazil's closely held media companies, fueling speculation that international investors are poised to invade Brazil's multi-billion dollar media market, of 175 million consumers.

In July, a private equity fund managed by the Capital Group, a U.S. asset management firm, spent US$50 million to buy a 13.8% stake in Grupo Abril, Brazil's largest publisher and owner of TVA, Brazil's No. 2 pay-television operator.

And in June, Brazil's Organizacoes Globo, Latin Americas biggest media company, agreed to sell up to a 60% stake in the cable company Net Servicos, Brazil's No. 1 pay-TV operator to Telefonos de Mexico (Telmex), Mexico's No. 1 telecom company. (Although it will hold only up to 49% in a special purpose entity, by Brazilian law, which could be changed soon and allow Telmex to take control of the cable operator.) The stake is valued at between $250 million and $370 million. Telmex recently closed a deal to buy Brazilian long-distance giant Embratel for $400 million.

Congress in 2002 passed a media law that allowed for foreign corporate ownership of up to 30% of Brazil's television, radio and print properties. Industry observers at the time said that a few deep-pocketed U.S. and European media companies might move in, but no foreign media companies jumped. Hobbled by their own bad investments during the 1990s and cautious--a 30% stake means no decision-making power--they decided to think twice before investing in Brazilian media groups, virtually all of which are tightly controlled by their founding families.

Now, foreign cash is beginning to trickle in. The money is coming from private investors consultants say don't need or demand control--yet. International investors who follow will likely be non-media players, too.

One factor now attracting foreign investors is the low cost of buying into financially troubled companies. Another is the economy, which under President Luiz Inacio Lula da Silva is far more stable and more robust than it was two years ago. The economy is expected to grow 3.5% to 4% in 2004, and with that rise go ad revenues.

"Some international investors may now be willing to buy a stake in Brazilian media companies, now that those stakes are cheap, and now that the economy is on the rebound, which should boost media ad revenues," says Marcelo Kneese, a partner at Sao Paulo media financial advisor Vergent Partners. "Such investors, among them private equity firms, will likely target companies like Net which have stock equity or those like Abril which plan to issue stock equity, because investors need to see a way of selling that stake at sizeable profit somewhere down the line."

Abril will continue to control the media company, although Abril's CEO Roberto Civita said at the time that more money could be coming soon. "The deal opens the path for a future opening of Abril's capital, an idea which has been lying dormant for several decades," Civita told reporters.

Media experts believe that Abril will, in fact, issue equity rather than court a foreign strategic buyer. A stock offering could give the Capital Group an exit strategy, one it needed before investing in Abril.

"Abril, like other media groups, realized that since foreign media companies would only invest in them if they could buy control, something not allowed by the media law, it began looking for foreign non-media players with other priorities," says James Sinclair, director of AF Partners, a Sao Paulo media financial consulting firm. "The priority of a private equity firm, like that managed by the Capital Group, is a high-return-linked exit strategy."

Another possible exit for Capital strategy could involve Abril's spinning off TVA into a separate firm and offering stock in the pay-television operator, provided it becomes profitable, says Sinclair.

The cable deal, meanwhile, is part of Telmex's "strategic plan to increase our investments and operational synergies in Brazil" says Telmex Communications Director Arturo Elias Ayub. A stake in Net Servicos "could possibly lead to Net's being able to offer its pay-TV services to Embratel clients," says Ayub.

The cable company's clients also gain from this partnership, says Net's Financial Director Leonardo Pereira, including making phone calls via Internet, known as voice-over-IP (Internet protocol), cable television and data services. "Net could, in the future, provide its cable-TV customers with these two other services, making it a so-called 'triple-play' provider," Pereira says. "The Abril and the Net deals show that foreign investors who aren't necessarily media companies are looking more closely into media-company opportunities in Brazil."

Red ink is the reason media groups like Abril and Globo cried out for such foreign investments. They took on billions of dollars in debt in the 1990s to fuel unprofitable expansions. The companies lobbied heavily for the 2002 law that opened the door to foreigners.

Abril and Globo, which launched TVA and Net respectively in the early 1990s, borrowed heavily to expand them in their race to be the No. 1 pay-TV operator. But their build-outs were based on flawed projections. The pay-television subscription rate stands at 3.5 million, well under the 15 million the companies expected. A slump in economic growth since 2001 also caused ad spending to nosedive, making it hard for Abril and Globo to generate cash to repay these debts. "Need for debt-paydown capital is why both groups recently closed deals with foreign investors," says Paul Groom, a managing partner at Sao Paulo consultancy Telefinance. Abrils debts are $315 million. Globopar, Globo's holding company is restructuring its debt, now at. $1.9 billion.

Once Globopar's debt is restructured, it is likely to issue equity, allowing other foreign investors to invest, in other Globopar assets besides Net, including Editora Globo, the publishing company of O Globo, a major daily newspaper; Globo Cochrane, a printing company; and the production studio assets of TV Globo, the country's largest television network. Last year, Globopar reduced its stake in Sky Brasil, a satellite unit.

Net, itself with a $450 million debt, in June reached an agreement with 70% of its creditors--mostly foreign and local banks--to issue new shares creditors could buy to reduce Net's debt to them. If all of Net's creditors take part, Net would convert at least $180 million of its total debt.

Virtually every media company in Brazil is also heavily indebted; they, too, desperately need to attract foreign investors. Ad revenues in 2003 were $3.6 billion, down sharply from $6.4 billion in 1998, according to media publishing house Meio e Mensagem.

High-risk. Likely media investment targets include media group Rede Brasil Sul (RBS) in southern Rio Grande de Sul state, and Folha de Sao Paulo and O Estado de Sao Paulo, two major Brazilian dailies, media consultants say. One possible foreign strategic investor is Mexican media giant Televisa, which could invest in Sistema Brasileiro de Televisao (SBT), Brazil's second-largest TV network. "It's no secret: that Televisa has, for some time, been talking with SBT about buying into the Brazilian network," says Kneese. "Televisa might be willing to de so, despite not getting network control, because of its desire to become a Pan-American media company, which is why it has invested in Spanish-language U.S. TV networks." SBT declined to comment.

"Investing in heavily-indebted Brazilian media companies continues to be a high-risk proposition," says Sao Paulo media lawyer Walter Ceneviva. "But given that the economy is on the upturn, and that these companies' ad revenues should increase, it's an investment with a potentially very high rate of return, which should attract investors."

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